I think we are approaching this from two entirely different universes.

I am looking for cause and effect; I want to see data that supports or detracts from the proposition at hand. PROVE TO ME that X caused Y (including actual statistics).

Your proposal of Diversity causing the housing crash reads to me as a soft philosophical argument that is by definition unprovable -- and undisprovable.

At the very least, I see no proof in your writings. They are cogent arguments that leap from A to B to C -- but they lack the rigorous statistical evidence to demonstrate something convincingly to people who insist on hard data.

In my belief system, I use as few assumptions as possible. I try to avoid things that are unquantifiable. Statistical back testing is just on way to do that.

But even softer analyses such as war-gaming and alternative scenarios have to have some reasonable basis for proceeding. It cant be all assumptions, beliefs guesses and hunches.

This shows heartening progress in just a few days. Before he was exposed to my work, Mr. Ritholtz was denouncing and demonizing anybody who shared my views.

I’ve run out of patience with tired memes and discredited claims by fools and partisan.

The rhetoric of those pushing nonsense on the public in an attempt to confuse rather than illuminate — the phrase is “agnotology” – only serves to aid the lobbyists working on behalf of the Banks and Investment houses to maintain the status quo. ..

The nonsense rhetoric blogged about has no cost to those pushing these discredited memes ...

Now, having finally read my articles, he admits I offer "cogent arguments." He no longer seems to think he can prove them wrong, so he's insisting that I haven't proved them right.

He today argues, not incorrectly, "but they lack the rigorous statistical evidence to demonstrate something convincingly to people who insist on hard data."

Of course, that tends to be true of all historical writing. As the venerable historian Jacques Barzun wrote at age 93 in his summa, From Dawn to Decadence, in one of his 12 modest dictums summing up what he's learned during his career as a historian:

The historian does not isolate causes, which defy sorting out even in the natural world; he describes conditions that he judges relevant, adding occasionally an estimate of their relative strength.

Further, let me point out, that I'm not done yet collecting data. For example, we now know the subprime default rates by race for the state of Massachusetts. We now know, on a national level, the default rates by race for FHA loans in the 1990s. Eventually, somebody will apply the same laborious process to the Big One -- California -- and then we will be a lot farther along.

In summary, as Mr. Ritholtz more or less admits, my arguments, long ignored, distorted, or demonized, deserve a place at the table in any discussion attempting to discern the historical causes of the present unpleasantness.

62 comments:

Same #$%@, different day. Liberals spend money on their causes like drunken monkeys without a shred of proof. Suddenly they want "proof" when you mess with their "who? Whom?"

Where's the proof that welfare helps? Where's the proof that AA helps? Where's the proof that diversity is good? Where's the proof that mass immigration is good? Where's the proof that Obama isn't screwing us over? Where's the proof of the good of anything that liberals have done since they took power?

Let's see Ritholtz prove something from his platform using his own criteria.

In fact, let's see how much of what Ritholtz endorses actually passes his criteria.

I'm guessing none of it. But let's be generous and say he's a mensch if he can prove 51% of his platform under his own criteria.

This isn't just a rhetorical point; if we can't prove much of anything vis-a-vis public policy using his criteria, then we have to conclude his criteria are bogus.

What are the dynamics of affirmative action in China? Obviously it operates differently there than here. It's puzzling why it even exists over there. After all there's a large, dominant majority population that's pretty nationalistic, and I don't believe there's a guilty segment, or segment that wishes to distinguish itself as morally better through AA. The gov't's main goal is to promote stability, but the main threats to stability would seem to originate in the dominant Han, rather than the ethnic minorities. That is, they shouldn't really fear minority agitation over AA, especially when the dominant Han wouldn't seem to tolerate such agitation in the first place.

One might presume that it's due to decades of communism, but China's version of Marxism certainly wasn't the same as the cultural Marxism that afflicts the West. It was pretty nationalistic, and despite Mao's efforts to wipe out traditional Chinese culture, many socially conservative elements seem preserved.

Mr. Ritholtz apparently claims to be a man who rejects the conclusions of all historians and social observers because such conclusions do not meet his inflexible standards of statistical proof. It would be interesting, however, to comb back through his writings to search for counterexamples.

Having said that, if I were an historian, I would lay the primary blame for the real estate boom and bust on the Fed for keeping the interest rates too low for too long. How much Bush influenced the "independent" Fed to do that is open to question. Surely Bush knew the "keep interest rates low" trick from Nixon who used it in 1972.

Low interest rates also, of course, helped minorities qualify for mortgages. So there are interlocking agendas to consider. (Being an historian is hard.)

Look, I really don't like all "diversity" stuff myself, but I've still seen ZERO real evidence it had anything substantial to do with the Financial Meltdown.

"Diversity" (at least in the sense Steve is using it!) also didn't cause the Crazy Iraq War, or lots of our other major disasters.

On this particular issue, I'd have to say that this Ritholtz guy wins hands-down.

The problem with making all sorts of wild, mostly-unsubstantiated charges is that it really hurts your general credibility going forward. For all I know, the Ritholtz guy has done the same thing on other issues.

On the top of AA in China, it's an apples to oranges comparison. First off, non-Han Chinese comprise only about 4% of their population. Still a sizable amount given the total, but nothing that's going to upset the cart. Second, a fair chunk of these minorities, especially in the northeast, are Koreans, not exactly the kind to ruin a system if they're given a few extra slots. China is hugely homogeneous, and a little AA isn't going to cause so much as a ripple even were their minorities to lie significantly below the Han mean in anything important. Contrast that with a country fast approaching over 33% NAM--we're heading towards a cliff and the Chinese are enjoying the view from the road.

1. You are correct that NAM defaults are much higher than white and asian rates. The mortgage crisis, which is only a subset of the much larger debt crisis, would be much less severe if NAMs repaid their loans at the white rate.

This is an important point that does not get acknowledged explicitly.

2. He is right that this was not the result of the CRA or other public coercion, but the willingness of mortgage bankers to make these loans and investors to buy them as long as Moody's and S&P put their AAA rating on them.

My problem with your many posts on this topic is that you ignore where he is right (#2), even while he and others does the same with #1.

As a result of you ignoring the culpability of investment banks, rating agencies, etc, and your extreme focus on only subprime lending, you oversell your perfectly valid point about the very high minority default rates, and the unwarranted assumption that they will default only at the white level.

Gardeners lying about their income has absolutely nothing to do with the current wave of commercial real estate defaults, and the impending wave of leveraged loans that will be defaulting and that were used to fund the LBO binge of 2004-2007.

He likewise has a point that your most recent points on this have been very light on statistics. Your first few posts showing default rates by race were excellent.

And again, you have not and will not be able to make the case that the CRA had much to do with the crisis. Besides being wrong as a matter of fact, it has the air of an excuse for the grossly irresponsible behavior of our evil Wall Street overlords and the dumb people who entrusted Wall Street with their money.

When did I ever say that Mr. Ritholtz's criticisms of the Usual Suspects were wrong? I've echoed those criticisms myself, but I don't spend a lot of time repeating them because: What would me be the point of me wasting a lot of space saying the same things that have been said by everybody else -- many of them, such as Mr. Ritholtz, being much more qualified to say them than I am?

In contrast, Mr. Ritholtz vociferously criticized my views before he had read up on them. Now that he is better informed, he is taking a more moderate line.

Barr-eee R. has realized that he made a marketing boo-boo by stomping on a conservative hoy button, so now he's trying to back up and hedge his position a little.

Political conservatives are the kind of peepul who are interested in financial matters and might buy books about the Federal Reserve? How was Barry supposed to know that, before he got messed up with iSteve?

"And again, you have not and will not be able to make the case that the CRA had much to do with the crisis."

Yeah, the fact that banks chose not hold the loans that qualified under CRA but rather sold them to Fannie and Freddie proves nothing. Would they have made those loans had there been no way to dump them? Well they didn't make such loans before, so I am guessing, no.

When we see than large numbers of mortgages in Sand States default (A), and we can then determine a large percentage of those mortgages were given to Non-Asian-Minorities who indeed defaulted(B), we can deduce laws that strong-armed/coaxed lending institutions to make those theretofore "risky" loans in the name of diversity were at fault (C).

If we accept that it was the Sand State defaults that were the prime driver in so many of these mortgage-backed securities being duds..........and thus wrecking 401K's, IRA's, retirement plans, and bonds bought by wealth funds and other nations (A again),............and enforcement of certain pro-diversity laws whatever-their-name was the cause of these loans being made...................what are we to conclude DID cause so many funds backed by mortgages to turn out to be junk?

Im kinda inclined to partially blame a LACK of regulation myself Steve. Ratings agencies should have been telling people these loans were garbage, and therefore no one should have been allowed to throw them in packages of mortgage-backed securities. For example: A 30 year ARM-liar loan with a ridiculous income/debt ratio of a person with a mediocre credit score shouldn't be put in a bag of securities featuring primarily conventional 15 year paper of people with good credit and a good income/debt ratio........................but this is exactly how these stinkers kept getting hid.

Im a long-time pal of a loan officer, and get this stuff straight from him. They make a loan, and sell it. If large banks are willing to buy lousy loans, then his boss tells him to make lousy loans and "get them qualified". The in-house underwriter has every incentive to approve it since she knows its gonna be sold anyway. The garbage gets sold, the packaged into securites, then traded to the investment class and fund managers, who cant possibly know whats in all that paper. There has to be a way to make sure junk stays "in-house" and is serviced by the seller. My idea is that loans with bad I/D ratios of people with credit scores below a certain threshold have to be serviced in-house by the seller.

You do God's work Mr. Sailer. I hope others appreciate you trying to find the cause of this financial Pearl Harbor so it doesn't happen again instead of doing what the elite would rather do: stick their heads in the sand like an ostrich.

Two ways: 1)Low interest rates reduce monthly payments, so more minorities can qualify for mortgages. The introductory or teaser rates on ARMs are linked to the low short-term rate set by the Fed. 2) Low rates have the effect of increasing real estate prices in general as more people take out loans to speculate on "the best investment you can ever make." As real estate prices go up, the collateral becomes more valuable, thus helping minorities (and everyone else) qualify for mortgages.

Lending decisions are normally made on three criteria: income, credit history, and collateral. With enough collateral, however, a lender will loan money to a known deadbeat. Pawnshops, for instance, will loan 50% of the value of collateral to anyone who walks in the door.

Towards the end of the bubble years, the loose standards of Fannie and Freddie were another contributing factor.

Yes, this gets to the heart of the matter - the logic. Correct me if I'm wrong, Steve, but I think your position is that: without the CRA over the years and other diversity programs and the *threat* of more CRA, the housing bubble/mortgage problems would not have happened.This is not the same as saying that it did not matter that Fannie Mae and Freddie Mac supported all the bad stuff with government backing and the crazy financial arrangements had nothing to do with it. He's just saying that without the CRA/Diversity-in-lending crap, the problem would not have happened.

OK, so, Bob, when you say they are both right, that doesn't jive with what I wrote above. I think Mr. Ritholtz's argument goes: CRA or no CRA/diversity-crap, the crazy financial arrangements would still have caused this crisis.

OK, did A cause B? That is what Mr. Anonymous is implying, and it's theory is that well, banks don't like to go broke. If they weren't forced into making crappy loans over the years under threat, then they would have been more rigid and stable, as they were in the past ( < mid-90's ? ). Now granted, all these bad loans weren't to minorities. They got on a roll. It definitely didn't help matters that the Fed brought the rates so low (and that last is part of Mr. Ritholtz argument against A causes B - meaning that the low rates alone made these bankers go mad, mad, mad, I tells ya!)

So, if only A can cause B, then Steve is definitely right on all counts, as you would need A to have B, resulting in C.

If other factors could cause B, then, either:

A + something else too caused B, (i.e. not enough info for this debate) , but B hasn't happened before like this, as Anon said.

--..but they lack the rigorous statistical evidence to demonstrate something convincingly to people who insist on hard data.--

-In my belief system, I use as few assumptions as possible. I try to avoid things that are unquantifiable. Statistical back testing is just on way to do that.--

Implicit in Mr. Ritholtz's arguments is that statistics, even those supported by back-testing, are an accurate measure of markets and market dynamics. His argument is rejected in favor of Praxeology when evaluating vast market dynamics where trillions of individual actions are at play. Individuals such as Ritholtz, and the models they employ, fail to understand and account for the incentives, and the emotions, that underly many human decisions. Mr. Ritholtz is unqualified, and likely unable to determine if a person, or vast population, engaged in certain behaviors for reasons of emotion. To that end, he cannot be sure of any statistical model. It is very possible to build a model, based on the wrong assumptions, but to arrive at the correct answer.

$4.2 trillion that would not have otherwise been in the housing market entered the housing market. This is the elephant in the room. Those loans then went bad at an excessive rate. (Along with many others that were more expensive than they should have been due to the extra $4.2 trillion in the market chasing the same housing.) The elephant defecated.

Mr. Ritholz is standing in his living room, waist deep in waste, crying, "Prove to me that that animal produced these droppings!" To which I reply, "Prove it didn't, stinky."

Now, I realize that there is another elephant in the room - the Fed - and it was also doing its part to contribute to the pile of easy credit we are now standing in, but it was wandering around contributing to the general level of dung in the room. Only the Fannie/Freddie/CRA elephant was standing in one spot, dumping its full load on the housing market.

First, Steve, let me offer my congratulations. Bringing an apparatchik to participate in Reason, even to a small degree, is an achievement as significant as it is rare. Since the defining characteristic of human beings is their (potential) ability to participate in reason, you are, as an above poster points out, doing God's work.

Secondly, I think you should stick to your guns regarding the strong version of your thesis, 'Diversity caused it'.

Here's why: you've already shown that the CRA and the long arm of CRA (threatened government enforcement) on private lenders, was the direct cause of the loans. That no significant amount of subprime loans were given prior to the threatened enforcement by the Bush administration ca. 2005 supports the strong version of your thesis. I think you have provided a neat little graph regarding the spike in subprimes ca. 2005 though I forget the exact date of publication.

This fact has important ramifications that have not been framed/ deployed in argument correctly.

First, diversitarians - always the first to throw poor whites under the bus - point out that a significant fraction of subprime/ NINJa loans were made to Whites. What is not pointed out is that these loans would never have been made - not ever - to poor Whites in the first place without the fact of diversity/ Diversity. Thus, damage done by White defaults on subprime loans are in fact to be tallied in the damage done by Diversity column, since they would not have existed without diversity (the biological and political facts of multiracial empire) or Diversity (the systematic ideology of equality built on the destruction of all standards and the denial of harm thereby caused).

Secondly, the oft claimed 'willingness' of mortgage bankers to make these loans is shown as false. Though there are other important fault lines in our financial system, the spectacle of bankers throwing money at poor people who incapable of repayment is not one of them. This is a direct result of government pressure and no other reason. Elements of the financial system that cracked under pressure, this is true but what is the source of that pressure? Diversity.

Except as a result of ideological pressure, I can't see the hundreds of billions (trillions?) of bundled toxic debt being inside the world financial system in the first place. We've seen bubbles before - tulips and high tech - but we've never seen what we're seeing right now.

There's a saying in certain dark quarters of the internet: "the taboo is the evidence". All these well-meaning journalists and financiers and politicians who are getting behind our Weimar-Zimbabwean monetary policies . . . why are they so silent/ abusive/ resistant to the strong version of your thesis? Because it's true.

Has anyone ever seen this much stonewalling about margin lending in discussions about the Great Depression I? I didn't think so.

I would caution against blaming the CRA too much for pushing lenders into making bad loans. The government can't make you make a trillion dollars in loans that you don't believe in. You can always get out of the business and go do something else.

The effects of the social consensus in favor of Diversity work more subtly and broadly. Imagine individual lenders are distributed along a bell curve from Ebenezer Scrooge on one end to as credulous as Jim Carrey's character in "Yes Man," a banker who approves every loan suggested to him. So, there are always optimists already out there. What the Diversity movement did was cut back regulatory restraints on the Yes Men and punish and demonize the Scrooges. Over time, this changes the whole culture of lending, moving the mass of lenders in the middle toward the credulous end.

Something else is that old-fashioned Predatory Lending became less demonized (the very term "predatory lending" became widely seen as faintly anti-Semitic), so people like Mozilo of Countrywide could run old-fashioned boiler rooms while winning plaudits from politicians and the press for empowering diversity.

He is right that this was not the result of the CRA or other public coercion

No, he is not right about this. Why do you think the CRA did not have a coercive effect? Steve has documented examples where they threatened to extend the CRA unless people complied with it in a de facto sense.

"Banks operating under the CRA could meet their obligations by buying up CRA loans or MBS built from CRA loans."

In another article he elaborates:

"One way of addressing this problem was buying the loans in the secondary market. Mortgage companies like Countrywide began to serve this entirely artificial demand for CRA loans. Countrywide marketed its loans directly to banks as a way for them to meet CRA obligations. "The result of these efforts is an enormous pipeline of mortgages to low- and moderate-income buyers. With this pipeline, Countrywide Securities Corporation (CSC) can potentially help you meet your Community Reinvestment Act (CRA) goals by offering both whole loan and mortgage-backed securities that are eligible for CRA credit,” a Countrywide advertisement on its website read."

So even loans made by non-CRA banks were being used to meet CRA requirements by CRA banks. On top of that, it seems likely to me that these "secondhand" securitized CRA loans were more likely to be risky, since the original lender had less incentive to ensure their worthiness.

I think it's obvious. The Chinese government knows that education speeds up the assimilation of minority nationalities. Thus, there more, for example, Tibetans study at in Mandarin Chinese and surrounded by mainly Han-Chinese co-eds, the faster the entire people shall assimilate to the dominant Han-Chinese culture.

Ritholz says: "I am looking for cause and effect; I want to see data that supports or detracts from the proposition at hand. PROVE TO ME that X caused Y (including actual statistics). [...] At the very least, I see no proof in your writings. They are cogent arguments that leap from A to B to C -- but they lack the rigorous statistical evidence to demonstrate something convincingly to people who insist on hard data. In my belief system, I use as few assumptions as possible. I try to avoid things that are unquantifiable. Statistical back testing is just on way to do that.".

Whether it represents his practice or not, I do not know; but these statements are sophomoric BS of a kind often seen among people who are technically trained but are not actually doing real science (tho' they often think that they are).

Such views are common among people who are content to allow their conclusions to be dictated by the limitations of their methodology - in this instance the conclusions are dictated by the evidence that can be represented statistically and by the inbuilt (and arbitrary) assumptions of statistical evaluations. This idea of 'rigor' is limited to narrowly technical concern, and strictly/ formally-speaking has no relationship at all to the question of whether a hypothetical proposition is valid.

(This is because the rules of statistical inference are 'conventional' and have no formal relationship to the rules of scientific inference.)

http://linkinghub.elsevier.com/retrieve/pii/0895435696000388

To say: "I try to avoid things that are unquantifiable." is simply to state that the author of these words is not a scientist.

In reality, science is about comparing rival hypothesis, comparing their strength and explanatory power; and the comparison should be made with as wide a range of methodologies are are relevant to the task in hand.

As I said - I do not know whether Ritholz's own work is a prey to these fallacies I have described - but the above statement of his views is consistent with a fairly common type of semi-science.

Ok, you got lots of money flowing to your shores from China, the Gulf states, etc. That money needs to be invested. Building houses is a good way, but there just isn't enough financially 'able' newcomers people to form a sizable market. So bring in bodies, lots of them, and pretend they're qualified buyers. How do you do that ? You drape this fiscal sleigh-of-hand under the guise of accessibility. This has two effects : it shields those shenanigans from scrutiny, as it makes it a 'good' thing that 'good' people can't criticize, and it opens up the market for qualified people who want to 'trade up'. It's not so much a conspiracy as a convergence of interests.

When did I ever say that Mr. Ritholtz's criticisms of the Usual Suspects were wrong?

Reply:

When you use phrases like "the diversity recession" and spend so much time on the CRA, you provide an alternative explanation that at least partially absolves the actions of bankers.

They're not greedy reckless immoral scum, they were just forced by Barney Frank and ACORN to make the loans!

Another point: Fannie and Freddie didn't do much wrong either.

During the boom they barely budged from their old somewhat strict standards, and as a result their market share dropped substantially. By law they never bought mortgages from brokers larger than the conforming limit of around $470,000 or garbage like 85/15 zero-down mortgages.

What the Diversity movement did was cut back regulatory restraints on the Yes Men and punish and demonize the Scrooges.---

No, the scrooges were out-competed because they weren't producing the raw material for the garbage loans that were so profitable to repackage and sell.

I suppose you could make a more subtle point that the left's traditional pro-regulation/anti-usury position was de-fanged by the realization that this attitude prevented poor NAMs from getting loans, and further was co-opted by Wall Street money that flowed to deregulation politicians regardless of their positions on other issues.

However the economic left was out of power from 1981-2008 when most of banking deregulation occurred, and the right never a justification to deregulate banks. Deregulation of finance is an end in itself for Phil Gramm/Alan Greenspan types.

"Thus, damage done by White defaults on subprime loans are in fact to be tallied in the damage done by Diversity column, since they would not have existed without diversity (the biological and political facts of multiracial empire) or Diversity (the systematic ideology of equality built on the destruction of all standards and the denial of harm thereby caused)."

Exactly. And this isn't the only instance. The diversicrats finally succeeded in getting extra time for tests, SAT's etc for students with "learning disabilities". Needless to say, the LD students tended to be disproportionately minorities, hence the special rules. So what happens next?

White middle-class and above parents whose children are plain old average or even above average get their kids declared LD so that they get extra time for tests, which likely improves their scores. Doesn't keep them OUT of any classes they want to be in - that's a no-no - but improves their grades, SAT's, etc. Clearly an abuse of the system as initially defined.

Now IMO, the LD students shouldn't have gotten extra time either - they aren't going to get extra time in life - but the fact remains that the second group of parents couldn't have taken advantage of the system if it hadn't been put in place for the benefit of the first group.

Those lousy loans - NINJA, no down-payment, interest only etc - would not have been available for the white house-flippers, etc if they hadn't been either encouraged or basically coerced out of lending institutions by the diversity issue.

And the fact that the lending institutions would not be keeping their trash loans made it easy and profitable for them to make. Absolutely.

As repeatedly demonstrated (e.g. in the Grutter and Ricci cases), Diversity-promoting policies rarely involve the explicit imposition of racial quotas. Quotas are easy to understand and unpopular with the public because of their obvious unfairness. In many contexts, they are also illegal.

Consider the case where a government agent wishes to favor a racial group that is disproportionately excluded from a benefit because a disproportionately high number of its members fail to meet a certain standard. Explicit racial quotas that lower the bar for this group would leave everybody else's standard unchanged. But this is forbidden.

However, the agent can increase the participation of the underperforming racial group by lowering the standard for everybody.

In the case of the residential real estate market, targeted beneficiaries were mostly Hispanics, mostly in the Sand States. The public and private sector actors doing the targeting are well-known. (Aside: Sailer identifies Rove's electoral strategy as the Big Idea that motivated Bush 43 to out-pander the traditional champs.)

The point is that Anonymous's recitation of the poor performance of risky minority borrowers is highly likely to grossly underestimate the damage done by the constellation of Diversity initiatives. Risky non-minority borrowers also "benefitted" from debased lending standards.

This argument shouldn't be pooh-poohed because it is logical rather than statistical in nature. Sensible, refutable hypotheses ought to count for something! Probably the biggest obstacle to well-powered statistical analyses is that lending and regulatory organizations don't compile and publish data in formats that are well-suited to tests of these concepts.

Why is that?

One possible answer can be found in Public Choice Theory, which predicts that organizations will not engage in behaviors that damage their perceived interests. Given the passion for Celebrating Diversity in government bureaucracies, the Republican and Democratic Parties, the Fed, GSEs, the media, and most large public corporations, why would one expect such damaging data to be made widely available? As Anonymous showed, Steve and "Tino" have made some impressive quantitative findings with the piecemeal evidence they have assembled so far.

Let me echo Steve's caution about blaming the CRA too much for pushing lenders into making bad loans. As he says, the government can't make you make a trillion dollars in loans that you don't believe in.

The way the CRA contributed to the problem is far more subtle than that.

1. It rewarded those who really did believe that there was a lot of money to be made if lending standards were relaxed, both on the individual and institutional level.

2. There was an agency problem here--bank managers get paid more for running bigger banks, something they could only do if they were great at making CRA loans. Was this in the interest of shareholders?

3. Under the aegis of the CRA, the government demanded automated, low-doc, high LTV, low down payment, "flexible" income requirements. The banks followed through.

4. The CRA certainly got banks to make loans they otherwise would not have. If you read the pre-bust assessments by liberals of the CRA, this is touted as one of its successes.

5. The early success of CRA loans--low losses--encouraged their securitization. The profits to issuers and investors on the CRA MBS, encouraged more securitization and more lax lending. People thought they had discovered that subprime loans were far less risky than earlier suspected.

6. Since the losses under CRA loans were so low, bankers decided to use those lax standards everywhere. Why leave money on the table?

7. A key to this process is that CRA loans and later subprime loans exhibited a very low prepayment risk. This risk--the risk of borrowers refinancing early to get lower interest rates--was a big problem for lenders while interest rates were dropping. CRA and subprime borrowers didn't prepay because they lacked the financial sophistication to understand the advantages of prepayment.

8. Guys like Mozilo realized that this low prepayment was evidence of a market failure, and so they went out to try to increase the prepayment rate.

Ritzholtz said:"In my belief system, I use as few assumptions as possible."

Yes, but he makes one big assumtion: All groups of people must be, on average, exactly the same above the neck. There's a heck of a lot less evidence for this than, say, Steve's diversity recession theory.

It would be a simple thing to provide the empirical evidence Mr. Ritholtz demands.

Look at the pool of subprime loans made to minorities. Look at the terms of those loans. Determine how many of those loans would not have been made under the credit standards of, say 1990 (before CRA and its relatives kicked in). Calculate the losses on those loans that would not have been made under a non-CRA credit regime.

Voila, you have an empirical estimate of CRA's contribution to the crisis.

I agree with everything you said, Steve, about diversity moving lenders toward the credulous end of the bell curve. But I can list four proximate causes for lender credulousness, in addition to CRA pressure, only two of which are diversity-related.

Fannie and Freddie paying good money for crap loans. (They did this partly to help minorities, but also to help the real estate industry and the banks.)

The hot market for collateralized mortgage obligations, which for a time paid good interest and were widely viewed as safe. These rapidly turned into toxic assets. (Not diversity-related, so far as I know. Wall Street greed is the cause of this one.)

Twenty years of real estate price inflation, the trend of which made mortgage bankers feel that loan collateral would be solid. (Much more caused by Fed and fiat money than diversity.)

The widespread belief that Hispanics would continue to pour into the sand states unchecked, putting upward pressure on real estate prices in those states. (Open immigration supported by diversicrats in both parties.)

There are many threads in the beautiful, diverse tapestry that is the history of the housing bubble collapse, and it's not easy to sort them out. Congratulations to you for the work you have been doing.

Seriously, the only facts that need to be known in this debate are this: First 15 years of the CRA; 8.8 Billion in loans, second 15 years of the CRA; 4.2 Trillion in loans. Does anyone really believe that banks suddenly were nearly 500 times wealthier or more generous? This was an example of CRA pressure combining with deregulation to create a vicious cycle. Regulators and activists putting pressure on the banks by stopping/delaying acquisitions and mergers which became a business necessity following repeal of Glass-Steagall which had separated investment and commercial banking for 60-odd years. They needed to merge in order to compete and if the competition was playing ball with the Feds that meant they had to as well. When mortgage standards were debauched for the benefit of the CRA, then everyone and their mother with good credit could now afford even more expensive property than before, this combined with very low interest rates from the Fed then feed the housing bubble. Add to the mix the fact that banks could then dump their dubious loans on to Freddie and Fannie and voila you have the implosion of the financial system. All you have to do is look at the incentives, the path to hell is paved with good intentions.

Ritholtz is a bright guy, and he was prudently bearish ahead of last year's crash, but his views are also colored by his liberal political ideology. That's why he keeps circling back to blaming everything on "Ayn Rand acolyte" Alan Greenspan, "economic neocons", etc. It is impressive that he kept his mind open enough to not dismiss Steve's arguments out of hand after reading them.

I'm not sure what kind of "proof" Mr. Ritholtz can reasonably expect. Economics is a fuzzy science at best, it's just not possible for a logical proof with the number of factors and the lack of reproducibility in the real world.

If such proofs were possible then all economists would agree on prescriptions like all Civil Engineers can agree on the strength of a bridge design.

"I suppose you could make a more subtle point that the left's traditional pro-regulation/anti-usury position was de-fanged by the realization that this attitude prevented poor NAMs from getting loans, and further was co-opted by Wall Street money that flowed to deregulation politicians regardless of their positions on other issues.

"However the economic left was out of power from 1981-2008 when most of banking deregulation occurred, and the right never a justification to deregulate banks. Deregulation of finance is an end in itself for Phil Gramm/Alan Greenspan types."

If you go look up the legislative history of Phil Gramm's repeal of Glass-Steagal, you'll see that Bill Clinton's priority was preserving/extending CRA as the price for signing Gramm's bill: a Lose-Lose outcome!

What is not pointed out is that these loans would never have been made - not ever - to poor Whites in the first place without the fact of diversity/ Diversity. Thus, damage done by White defaults on subprime loans are in fact to be tallied in the damage done by Diversity column, since they would not have existed without diversity (the biological and political facts of multiracial empire) or Diversity (the systematic ideology of equality built on the destruction of all standards and the denial of harm thereby caused).

Strictly speaking, you'd also have to include defaults on prime mortgages that were higher than they would otherwise have been if the rising popularity of sub-primes hadn't inflated house prices.

Anonymous said:Look at the pool of subprime loans made to minorities. Look at the terms of those loans. Determine how many of those loans would not have been made under the credit standards of, say 1990.

A more salient analysis would be to compare Banks and Credit Union real estate lending practices in 2005.

Credit Unions didn't join banks in the hand-over-fist money making free-for-all because Credit Unions are required to keep about 75% of the mortgages they originate in portfolio. As Mike Schenk VP economics and statistics for CUNA wrote recently In contrast, other financial institutions focus on maximizing profits, and this often means that shareholder wealth is built on the backs of consumers. Many of the bad actors who contributed to the current crisis attempted to make a quick profit by peddling loans that were clearly inappropriate for most borrowers. Common to these lenders were dubious products such as no documentation or “liar” loans, interest-only loans, and adjustable rate loans that became unaffordable after rate resets. And many of these bad actors securitized and sold their toxic assets into the secondary market.

I closed my family's Citibank account and open accounts in our local Credit Union once its representative assured me in writing they could not issue liar loans. I often drive by my local Citibank now and wonder why people bank there.

If you go look up the legislative history of Phil Gramm's repeal of Glass-Steagal, you'll see that Bill Clinton's priority was preserving/extending CRA as the price for signing Gramm's bill: a Lose-Lose outcome!

Yes, we got the worst of both possible worlds. I call this the "Debtquity and Diversity" coalition. That is "Debtquity" Right-liberals and "Diversity" Left-liberals. Its kind of the Dream Team for (post-)modernizing liberals.

But really, the Gramm-Clinton team had nothing on the Greenspan-Bush team when it came to lowering bars and opening flood gates. It was here that Bush's "Ownership Society" strategy really came to fruition. His financial policies pampering to the economic Masters of the Universe on Wall Street meshed beautifully with his cultural politics pandering to the ethnic Greater Fools on Main Street.

In the aftermath of dot.com and 911 Bush had a general policy strategy of re-flating the US economy using the glut of cheap NE Asian capital. This flood of cheap cash found a ready-made destination financing a housing bubble.

The "diversity" angle is so important here and makes this bubble different from other bubbles like LCTM, dot.com and tel.coms. It turned an elite scam into a popular national past-time. And the scam went from virtual to actual through the mechanism of debt-financed over-construction and over-consumption.

Almost by definition minority sub-prime borrowers were the first to go bad. And they appear to be the single largest demographic involved in this class of borrowing. So once they went under the whole house of cards collapsed.

Theres a big difference between equity and property markets, from an economic perspective. If you pump alot of funny money into a equity asset market causing it to boom and bust then what normally happens is a re-distribution of value from late-comers to early birds, minus dead weight losses to transaction administrators.

But property is different asset class because so much real resources are spent on construction and consumption. So there is actually a destruction of value. Those losses are irretrievably sunk.

Returns were liquidated, not just diminished. The massive sums borrowed were actually spent ie spurged in both financing the construction of sub-marginal houses and in re-financing to cover consumption durables.

And they were humongous because basically everyone was in on it, as Bush-Greenspan tried to popularise financial practices that were previously elite concerns. Debauched credit standards are a feature, not a bug, when you believe free markets are perfectly rational. Particularly when you are trying to use them to entice a wavering demographic into your political column.

So these losses came straight off the bottom line of the ultimate owners of toxic assets. So these giant financial firms crashed, since their losses were real (in liquidated flows) rather than nominal (in dissolved stocks).

Think of the scale of realised losses it runs into about one trillion dollars. More or less the size of the TARP fund. Thats about on a par with total US corporate profits for one year. In effect the busting of the four year housing bubble bankrupted US capitalism for a period of one year.

Basically liberalism keeps pushing the envelope, extending freedom to ever more groups of people and ever more areas of conduct. That was great for a couple of hundred years, from the mid-1770s up until about the mid-1970s. Right then it started to run into diminishing returns, which is why we had a Culture War.

A friend of mine in Fairfax County VA bought a house about 25 years ago for less than $130K. Last summer, it was assessed at $423K; this summer at $299K. He's happy - lower taxes! However he lives in a neighborhood with a boatload of houses that are long-term empty or in foreclosure.

I asked him if most of them had been the previously over-crowded houses in his neighborhood. He replied that they ALL were. Well, we understand what happened here.

Now he rode the Hispanic inundation of his neighborhood out. Lots of other people all across Northern VA didn't do that - they moved when they saw their neighborhoods start to deteriorate. They didn't need sub-prime mortgages; they had solid credit.

Where did they move? Farther out into newer developments. These newer developments were not small bungalows but large over-priced houses needing two workers to pay the mortgage and upkeep. What happens if one - or worse still both - loses a job or has his hours cut? This is what we are starting to see now.

Elizabeth Warren's "The Two-Income Trap" was written well before the housing bubble but the message is the same. It takes 2 incomes to keep a family afloat because houses in decent school districts aren't cheap. In fact, very few new houses are cheap.

Steve,I've been a follower of the Barry Ritholtz blog for several years now, and in my experience he's honest, clear thinking and one hell of a thorn in the side of the corrupt banker/Wall St./government con game. So I'm reassured that, having been persuaded to read your posts more thoroughly, he's softened his opposition to your views somewhat. This is just what I would have expected from Barry.

My own view is that the CRA debacle was one of several factors that lead to our downfall, although I am unable to attribute to what degree this stupid socialist interference in the markets was to blame.

I hope two excellent and honourable bloggers can meet somewhere in the middle in this debate.

And how does your theory account for the high proportion of NAMs defaulting then - given their newly conferred status as economic powerhouses?

Once the value of their house falls below its purchase price they can walk away from it at zero cost, having no fixed identity. If US citizens could do the same thing the housing crash would be much worse.

David,I think 2 things come together:- Food industry artificially creating food which speaks to the taste bugs but is generally unhealthy/deadly in order to increase sales- Lack of physical work/effort in modern day service industry with lots of automation

If we had to plough fields walking alongside an oxen or horse, or dig every trench ourselves, or walk everywhere, or ride by horse, we would not eat burgers because we would need real energy, like from potatoes or brown bread.

"Sure the standards of food inspection were relaxed, but the real problem is gluttony. People got food poisoning only because they insisted on eating what was set before them.

The food poisoning rate would be reduced if we curtailed man's irritating attraction to food. The culture of greed is the culprit. I blame Reagan."

David,

You can't be serious. My brother in law is thin and got food poisoning and nearly died. Food poisoning does not discriminate. Thin people and children get food poisoning. It is an infection not a punishment for sin. Also, humans were greedy before Reagan.

Maybe those wealthy illegals making more money than us regular white slobs invested it in real estate and got screwed.

No, if they were making so much cash being not-gardeners then they would have kept up the repayments and the property market would not have collapsed. OK, it would have crashed in the end anyway but these powerhouse NAMs would be no more burnt than anyone else.

if they were making so much cash being not-gardeners then they would have kept up the repayments and the property market would not have collapsed.

They have no reason to keep up the payments once the property value declines. It's not like their credit history will be damaged if they walk away. They can just move across town and give themselves a different SSN.

Thanks for your helpful article. Other thing is that mesothelioma cancer is generally a result of the breathing of fibers from asbestos, which is a cancer causing material. It's commonly observed among individuals in the engineering industry with long experience of asbestos. It can be caused by residing in asbestos covered buildings for years of time, Family genes plays a huge role, and some persons are more vulnerable to the risk compared to others.

I also believe that mesothelioma is a scarce form of cancers that is commonly found in people previously exposed to asbestos. Cancerous tissue form while in the mesothelium, which is a protecting lining which covers most of the body's areas. These cells usually form within the lining of the lungs, belly, or the sac that really encircles one's heart. Thanks for expressing your ideas.

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